What are cities good for?

Economist: What are cities good for?

IN COMMENTS, Stephen Morris asks:

What is the evidence that cities are more efficient ways of organising economic activity? Specifically, how do we know that - in this day-and-age of telecommunications - the existence of cities arises from superior efficiency in organising economic activity, and not merely from superior efficiency in organising rent-seeking?

It's a good question. How do we know cities are productive and not just centres for rent-seeking? The answer is simple: because they export. ...

... Why would a bottom-line oriented firm pay so much for land and labour? The only reasonable explanation is that they're getting something in return. There must be location-specific advantages that deliver productivity savings which compensate for higher costs. Otherwise, firms would move to cheaper locations, produce for less money, and undercut the Bay-area businesses. And what the research indicates is that skilled-worker productivity is often much higher in dense agglomerations. That's the benefit firms get. That's why the firms can afford to pay high wages. ...

... Incidentally, we have a pretty good idea what happens when location-specific advantages disappear, as they sometimes do. When transportation costs were higher, there were huge advantages to industrial agglomeration. But as transportation costs fell, those advantages weakened. As a result, producers began doing just what we'd expect them to do: moving their operations to lower cost areas and undercutting the high-cost urban firms. This destroyed the high-cost industrial firms and the high-cost economy that had grown up around them, producing hollowed out cities across the American midwest and northern Britain and Europe. Only in those cases where another industry with different location-specific advantages arose did cities recover. These new "knowledge" industries may themselves prove vulnerable at some point in the future. For the moment, however, the exporting capacity of metropolitan firms suggests that economies are deriving huge benefits from their cities.

Comments

[Go To College]

Very informative post!!! I really like it...